Economic effects of pandemic flu in a recession

While health authorities worry about the human cost of pandemics, other policy-makers have tended to focus on the economic costs. Economic impact takes many forms--drops in production as workers stay home, drops in commerce as shoppers avoid crowded places, drops in tourism as travelers avoid affected areas. Does the current economic crisis make us more vulnerable than usual, if the swine flu outbreak in Mexico and a few US cities goes pandemic?

Two recent illnesses that seemed to pose a threat of pandemic disease--bird flu and SARS--give us some insight into the kind of economic impacts we need to consider.

SARS and Bird flu

In the case of SARS, there was a substantial economic impact, with the affected Asian countries losing $25 to $30 billion mostly in the tourism, service, aviation, and restaurant sectors--and another $2 billion lost in Toronto alone. In addition to the lost dollars, there were also serious job losses--up to 3 million jobs just in China, Hong Kong, Singapore, and Vietnam.

In the case of bird flu (aka avian influenza), the economic impacts were rather different. Much of the impact--an estimated $10 billion--resulted from culling poultry to stem the spread of the disease (and the related costs to the government for equipment, personnel, and so on).

Current swine flu threat

Those were both instances where the threatened expansion to pandemic disease did not occur. Just the threat, though, caused widespread ripple effects--not only do people avoid tourism to the affected areas, people already in the affected areas take more drastic measures to limit the spread of the disease. For example, in Mexico, government officials have closed schools and advised people to avoid crowds.

People tend to pay some attention to government announcements of that sort, but they also do their own thinking--and may take more drastic measures, such as staying home from work and avoiding stores. That can have serious economic effects.

A recession, though, may actually mitigate some of those effects.

People are already avoiding unnecessary shopping, so economic activity probably won't fall nearly as much from their already-low levels as they would have otherwise. Similarly, people who are unemployed are already not going to work, so it makes no difference if they continue staying home.

On the other hand, many people who still have jobs are probably more afraid than usual that they might lose them. That, combined with other pressures from the recession, might prompt people to go to work even when they fear exposure to contagious disease. (In fact, we already see this happening.) This may reduce the economic impact, but potentially at the cost of greater illness and death.

Fear and reality

Just fear of a pandemic can produce substantial costs to the economy, if people stay home rather than work and shop. If a really deadly disease becomes widespread, however, things can get much worse. People who are in the hospital can't come to work no matter how great the risk that staying home might cost them their job. And, of course, people who are dead never return to work at all.

The 1918 flu pandemic is estimated to have killed at least 2.5% of the world population. With the current world population, similar results would mean some 170 million deaths worldwide.

That sort of population decrease has far-reaching economic effects. With fewer people, there's less demand. Less demand results in lower prices--potentially for everything (food, housing, consumer goods, factory equipment). The result might well be yet another downward leg in the recessionary spiral.

On the other hand, it's a different sort of drop in demand. The normal recessionary spiral results in dropping standards of living, because people (whether by choice or due to economic circumstances) buy less. A drop in demand produced by a smaller population, though, doesn't necessarily have the same result--individual household consumption can actually rise (because the things they want to buy are cheaper) even though total consumption is down (because there are fewer people). In the aftermath of the Black Death, standards of living actually rose (for the survivors), due to higher wages for now-scarce workers.

In a financial crisis

There is, though, a related but different set of dangers. The financial crisis has put the economy into an unusually stressed state, exposed to many risks that too few policy makers and financial executives expected. The danger of pandemic disease is yet another layer of risks and costs on top of a financial industry that is already undercapitalized and holding large amounts of debt that is never going to be paid back. The costs--workers staying home, executives unable to travel--are probably modest. The risks, though are huge:

Businesses in industries affected by pandemic (or fear of pandemic) will fail, leaving their debts unpaid

Debtors will die, leaving their debts unpaid as well

Families will lose breadwinners, adding to the burden on aid agencies and others

Governments will be too distracted by the new crisis to deal effectively with the old one

On balance, I'd say that the recession generally reduces the financial impacts of pandemic disease. The financial crisis, however, makes the economy particularly vulnerable to any shock. I don't see much that ordinary people can do to mitigate those risks. The risks ordinary people should keep their eye on are the risks to their health.

Another US government site flu.gov has lots of policy suggetions aimed a minimizing economic impacts. (For example, they advise against closing schools in favor of having sick people stay home.)

The Economist had two recent stories on the economic impact of the flu: Cold comfort (The economic impact of swine flu may not be that bad) and The cost of swine flu (Swine flu hits public health and the economy in South America.]

Disclaimer: The links and mentions on this site may be affiliate links. But they do not affect the actual opinions and recommendations of the authors.

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Guest #1

I'm prepared to quit my job if a pandemic hits. I'm in an occupation where I have a high risk of catching things from my clients. Bugs tend to hit me hard. I have an 18 month emergency fund and I'm prepared to use it rather than working through a pandemic.

Wanted to say great article! Earlier today I posted on How You Can Protect Yourself in the Event of An Emergency Like a Pandemic. I also linked to this article, you might want to check it out. I'm updating it as we get more info. It also has a list of who to follow on Twitter.

It's interesting to think about the economic effects, but if it's a real pandemic that will be the last of our worries, although it will affect us indirectly by cutting off our supply chains, etc.

I remember during the height of the SARS hysteria I was traveling through Canada (airline connection) and there were a couple of agents waiting for the plane at the gate with a thermal camera to pull out any passengers who looked like they were running a fever... oh boy...

There are some real economic costs to this flu, if it continues to spread. Fear will prevent people from going through with travel plans. It will also make people think twice before going out: to the mall, to entertainment venues, etc. The expectations of such alone will have a substantial impact on the economy. And if not contained timely, there will also be some very real impacts.

Yes, the economic impact is unfortunate especially in tourism-dependent countries, but the reverse is worse: not getting the word out early enough, or at least enough in time to make vaccines needed in case the virus mutates into a more uncontrollable form...